Briefing Paper #152

On April 23, 2004 the Department of Labor (DOL) published regulatory changes that, if they are allowed to take effect, could strip away the right to overtime pay for over six million workers. The original version of these rules, proposed by the Bush Administration in March 2003, would have stripped overtime protection from eight million workers. In the face of widespread public opposition, the administration promised that its final version of the rules would correct this problem, a promise it has failed to keep.

Under the current Fair Labor Standards Act (FLSA) regulations, most workers are guaranteed the right to overtime pay, commonly known as “time-and-a-half,” for every hour worked beyond the normal 40-hour workweek. Three basic tests determine whether workers are exempt (i.e., ineligible for overtime pay) or non-exempt (i.e., eligible for overtime pay). The regulatory changes issued by the Bush Administration in April 2004 would make drastic changes to these tests, vastly increasing the number of exempt employees and making it likely that millions of them will work longer hours at reduced pay.

Under current law, each of the following three tests must be met to classify an employee as exempt and therefore ineligible for overtime. First, the “salary-level test” stipulates that employees earning less than a certain level each week cannot be exempt. Second, the “salary-basis test” states that employees must be paid a set salary—not an hourly wage—in order to be exempt. Finally, the third screening test is the “duties test,” which states that a worker cannot be denied overtime pay unless his or her duties are primarily “administrative,” “professional,” or “executive” in nature.

The new regulations would raise the salary level under which all employees are protected to $455 per week (i.e., any employee making under $455 would be eligible for overtime benefits). Under current law that level is set at $155 ($170 for professionals), a pay rate that has remained unchanged since 1975. A salary of $455 per week equals an annual salary of just $23,660, about $5,000 a year above the poverty level for a family of four. And because the exemption level is not indexed for inflation, it will protect fewer and fewer workers over time. Initially, about 400,000 employees who work overtime will now be paid for it.

The many other rules changes—principally those amending the three key duties tests—would dramatically increase the number of workers who would be classified as “professional,” “administrative,” or “executive” and thus remove millions of additional workers from overtime coverage.

Changes in the primary duty test and the redefinition of “executive” will allow employers to deny overtime pay to workers who do very little supervision and a great deal of manual or routine work, including employees in factories and industrial plants. Employees who can only recommend—but not carry out—the “change of status” of the two employees that they “supervise” will be exempted as “executives” even if they manage nothing more substantial than a team or grouping of employees. In all, 1.4 million low-level, salaried supervisors will lose their overtime rights, along with 548,000 hourly supervisors, who could be switched to being paid on a salary basis and thus denied overtime protection.

More than 900,000 employees without a graduate degree or even a college degree will be designated “professional employees” and lose the right to overtime pay, even if their pay and status fall far below that of degreed employees. As many as 2.3 million team leaders with no supervisory authority will be exempted as “administrative employees” even if they are line or production employees.

Approximately 130,000 chefs and sous chefs who are not executive chefs will be exempted as “learned professionals” and “creative professionals.” Pre-kindergarten and nursery school teachers, no matter how low their pay, will be exempt under the new rule, even if their work does not require the exercise of discretion and judgment. We estimate that 30,000 nursery school teachers will lose the right to overtime pay.

Mortgage loan officers will be affected by the new financial services industry exemption and by the gutting of the protections for employees who are line workers, rather than policy or business operations staff. Ultimately, 160,000 mortgage loan officers will lose the right to overtime pay that they currently have today.

In addition, nearly 90,000 computer employees, funeral directors, and licensed embalmers will become exempt professionals and lose their right to overtime pay.

Furthermore, the DOL creates a new exemption that will deny overtime protection to otherwise nonexempt employees who earn $100,000 or more a year, as long as they regularly perform a single task that could be considered characteristic of an executive, administrative, or professional employee. This new provision will exempt an estimated 400,000 employees who currently are entitled to overtime pay.

Altogether, we estimate that nearly six million employees will lose their right to overtime pay on the basis of just 10 of the many changes the final rule makes in these critical regulations. The total effect of the new regulation is undoubtedly greater, but we have been unable to determine the impact of many of the changes with any precision. The broad new exemption of employees in the financial services industry, for example, combined with the elimination of the provision in current law that protects the overtime rights of “line” or production workers, might affect hundreds of thousands of additional employees, but we have not been able to make a reliable estimate of these numbers. The final rule also greatly expands the exemption of “outside sales employees,” creates a new exemption for athletic trainers, and weakens the overtime rights of tens of thousands of editors, reporters, and journalists “performing on the air in radio, television, or other electronic media.”

Millions of families count on overtime pay to make ends meet, a need that has only increased in importance as wage growth continues to stall. If anything, the protections that workers are afforded under the FLSA should be further strengthened, not weakened.

Background

The Fair Labor Standards Act of 1938 (FLSA) established the expectation that American workers would have a normal workweek of 40 hours. For most workers, it guarantees the right to overtime pay—often referred to as “time-and-a-half”—for each hour worked beyond 40 in a week. In 1999, the U.S. Department of Labor estimated that almost 80% of the nation’s 120 million wage and salary workers were entitled to overtime protection under the FLSA.

Section 13(a)(1) of the FLSA states that the obligation of employers to pay an overtime pay premium for each hour beyond 40 worked per week does not apply to “any employee employed in a bona fide executive, administrative, or professional capacity.” The regulations to implement that exemption have been in place since 1940, with few significant changes, except to increase coverage and raise the dollar amount of the salary-level test. Being designated exempt from overtime protection generally requires meeting three tests: (1) the amount of salary paid must meet minimum specified amounts (the

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EPI is an independent, nonprofit think tank that researches the impact of economic trends and policies on working people in the United States. EPI’s research helps policymakers, opinion leaders, advocates, journalists, and the public understand the bread-and-butter issues affecting ordinary Americans.